The Beginning of the End of Too-Big-to-Fail

Amidst an endless series of votes on amendments to a federal budget bill, the United States Senate voted 99-0 in favor of an amendment to end subsidies to too-big-to-fail financial institutions.

The stated purpose of the amendment, introduced by Senators Sherrod Brown, D-Ohio, and David Vitter, R-Louisiana, is to "end 'too big to fail' subsidies or funding advantage for Wall Street mega-banks (over $500 billion in total assets)."

This 99-0 vote is a harbinger of things to come — if the public keeps ratcheting up pressure.

Another amendment, introduced by Senator Jeff Merkley, D-Oregon, that would facilitate the criminal prosecution of U.S. financial institutions that break the law, regardless of size, passed by on a voice vote.

It is true that the Brown-Vitter and Merkley amendments were attached to the budget resolution, which does not have the force of law, and that the Senate and House of Representatives budget resolutions are in any case not going to be reconciled into a single resolution that passes both houses.

But that shouldn't cause us to lose sight of the importance of what happened in the Senate last week. No Senator was willing to stand up on behalf of the Wall Street behemoths. That's because they feel the growing public demand for Congress finally to act to break up the big banks. A growing number of them, on both sides of the aisle, are so disgusted with Wall Street abuses that they now genuinely believe in the need to address the too-big-to-fail problem.

Too-big-to-fail is shorthand for the idea that the government can't allow giant banks to fail, no matter what they do or how insolvent they may be, because their size and interconnectedness with other financial institutions means failure will have a domino effect that will imperil the entire financial system.

In recent months, it has become apparent that too-big-to-fail has morphed into too-big-to-jail: That fear of damaging the overall financial system is inhibiting prosecutors from criminal prosecuting the giant banks, no matter how egregious their wrongdoing.

The poster child for too-big-to-jail is HSBC. In December, the banking goliath agreed to pay more than $1 billion in fines and entered into a deferred prosecution agreement for anti-money laundering and sanctions violations. (Under a deferred prosecution agreement, the government agrees not to prosecute a company for criminal violations, so long as the targeted company carries out agreed upon reforms and does not repeat its violations of the law.) Then-Assistant Attorney General Lanny Breuer said the company was guilty of "stunning failures of oversight — and worse" and that the "record of dysfunction that prevailed at HSBC for many years was astonishing."

Breuer was correct.

The statement of facts attached to the deferred prosecution agreement with HSBC is startling. Just two illustrative examples:

As regards money laundering for Latin American drug cartels, "Senior business executives at HSBC Mexico repeatedly overruled recommendations from its own AML [anti-money laundering] committee to close accounts with documented suspicious activity. In July 2007, a senior compliance officer at HSBC Group told HSBC Mexico's Chief Compliance Officer that '[t]he AML committee just can't keep rubber-stamping unacceptable risks merely because someone on the business side writes a nice letter. It needs to take a firmer stand. It needs some cojones. We have seen this movie before, and it ends badly.'"

As regards efforts to facilitate evasion of U.S. government sanctions against other countries, the statement of facts says, "[B]eginning in the 1990s, HSBC Bank plc ("HSBC Europe"), a wholly owned subsidiary of HSBC Group, devised a procedure whereby the Sanctioned Entities put a cautionary note in their SWIFT payment messages including, among others, 'care sanctioned country,' 'do not mention our name in NY,' or 'do not mention Iran.' Payments with these cautionary notes automatically fell into what HSBC Europe termed a 'repair queue' where HSBC Europe employees manually removed all references to the Sanctioned Entities. The payments were then sent to HSBC Bank USA and other financial institutions in the United States without reference to the Sanctioned Entities, ensuring that the payments would be processed without delay and not be blocked or rejected and referred to OFAC. HSBC Group was aware of this practice."

Perhaps we've grown cynical, but while it's outrageous, it doesn't seem completely surprising that companies that systematically violated the law in ways that led to the crashing of the economy and the displacement of millions from their homes would escape criminal prosecution.

However, one might still expect criminal prosecution of a bank that facilitated narco-trafficker money laundering on a massive scale, and that aided countries the United States treats as enemies.

You might think that, but you'd be wrong.

Why did a company engaging in such egregious practices, which facilitated illegal drug trafficking and evasion of U.S. sanctions against foreign countries, escape without a criminal prosecution?

According to Breuer, the worry was that a criminal prosecution of a giant bank like HSBC might bring down the company and threaten the global financial system's stability.

A smaller bank, presumably, would have received no such deferential treatment.

In other words, the mere fact of its excessive size enabled HSBC to escape criminal penalties; it has been judged too big to jail.

But HSBC is not off the hook just yet. Other governmental agencies have the power to impose real sanctions on the company, if they choose.

At the end of January, Public Citizen asked the Federal Deposit Insurance Corporation to revoke HSBC's depository insurance, based on FDIC's authority to terminate insurance where a banking institution has engaged in "unsound practices" or "violated any applicable law."

We also asked the Maryland Attorney General to strip HSBC of its operating charter (the company's U.S. subsidiary is chartered in Maryland), based on authority to take away the charter for a company engaged in a conspiracy "to engage in criminal activity as a significant source of income," or where the corporation's activities serve to "aid, or abet the violation of criminal laws relating to … illegal drug distribution."

More than 38,000 people have joined the call on the Maryland Attorney General to strip HSBC's charter. You can, too:

The Dodd-Frank Wall Street Reform and Consumer Protection Act did many important, positive things, but it did not adequately grapple with the problem of oversized Wall Street banks. The Senate's 99-0 vote on the Brown-Vitter amendment and passage of the Merkley amendment heralds what's to come. This is our time to make real change.